Bigger, Better, Bakken: Petroleum Industry Optimism In North Dakota

Oil is a growth business, despite the change in the world’s energy mix.

With exports from the Bakken formation centered on western North Dakota already heading to Asian and European markets, the future for North American shale and onshore production, for at least the next two decades, appears promising, according to Barry Biggs, Vice President of Onshore for Hess.

In an exclusive interview with Western Wire, Biggs outlined the opportunities for oil fields like the Bakken and the local investments and job creation oil and gas production has contributed to the state’s coffers, while also addressing the formidable task posed by regulatory and investment challenges to the industry through 2040.

Growth and Optimism

Biggs, speaking Wednesday at the DUG Rockies conference in Denver, previewed his remarks, focusing on the tremendous growth in demand for all energy types over the next few decades, a number the International Energy Agency forecasts will increase by 25 percent, even after accounting for increased energy efficiency.

“To put this energy demand growth in perspective, it will be like adding the equivalent of the total energy used in both North America and Latin America before 2040,” Biggs said.

In order to meet that growth in energy demand from onshore and offshore investments, approximately $580 billion per year—more than $12 trillion in total—would be required, according to the IEA.

Meeting that challenge in the face of a curtailment in investments since 2014 at almost 40 percent, Biggs said, begins with addressing key issues he argues will not only promote additional investments moving forward, but also delivering critical economic benefits in areas that see additional production to meet future demands.

“My key messages here are that really there is optimism, optimism from the standpoint of oil as a growth industry going forward, inclusive of a lot of changes in the energy mix. Oil is still a growth industry and the Bakken is a key basin to supply energy needs,” Biggs said.

“Adding the equivalent of a North America or Latin America is quite significant. Even with the decline of coal and the increase in natural gas and renewables, oil itself will still have about a 14 percent increase in demand over that time frame,” Biggs added. How the industry meets that demand, from shale basin plays to export capabilities, he said, would be the focus of his talk.

“What is going to be the response required to meet that demand?” Biggs asked. The decline in investment since 2014, he argued, has lowered annual investments to the $400 billion mark, well off the targeted investment levels the IEA and Biggs see as essential to meeting future energy demands. Some offshore sectors have seen investment declines approaching 70 percent.

Biggs outlined what the current state of play in the upstream sector as far as investments are concerned, setting the table for how the leap in energy demand could be addressed.

“We see today a rough parity between offshore conventional, onshore conventional, and shale in terms of the investment that the upstream industry is pouring in at 30 to 40 percent each to get to the 100 percent number,” Biggs said.

“How are we going to meet that 14 percent oil demand moving forward? Hess’s hypothesis is it’s going to take both—the short-cycle shale work and it’s going to take long-cycle deepwater to meet that demand,” Biggs argued.

To that end Hess, he said, has positioned itself by shedding some assets in the Utica and Permian basins, while focusing on the Bakken formation and overseas in Guyana.

“It’s all about investing where the best rocks are,” Biggs said, both onshore and offshore.

One Company’s Position

For Hess, Biggs said, applying “lean capabilities” and having the ability to ramp production up from 130,000 barrels per day to as much as 200,000 bpd would take additional infrastructure by 2021.

“The Bakken is our crown jewel in the near term,” he added. An internal study commissioned by Hess’s board pointed to value delivery that Biggs said placed his operations in the top-tier of the basin, saw cost reductions and asset optimizations was adding value, called for additional technological investments, and put the company in a robust position regarding remaining inventory.

“To do that we have to have an infrastructure in place that can get the crude, natural gas, and liquids out of the basin,” Biggs continued. He pointed to projects like the recently completed Dakota Access Pipeline (DAPL) that allows the company to be well-positioned for near term expansion.

“If we dig into that, from a top-tier operator standpoint, we really think about safety, quality, and delivering in cost at Hess,” Biggs said, pointing to the company’s record on spill safety, uptime in the “digital oilfield,” a 60 percent reduction in development costs, and higher productivity overall.

“Using technology to continue to drive that development cost down,” Biggs said, like rig automation and the right completion design for the reservoir, “not a one-size-fits-all” approach, and machine learning, allows the company to take advantage of its Bakken plays.

Significant “running room” with regard to inventory in the upstream space, adding to the gas compression and processing capacity in the midstream space, and add that to export options like DAPL and other interstate pipelines gives Biggs a good reason to be optimistic.

“So you take that growth in the gas gathering side, you add that with the export pieces like DAPL and interstate pipelines that are expanding, we really feel we’ve got the ability to get our product to market with a lot of optionality to the higher priced markets,” Biggs said.

“We’re very, very excited,” he added.

Up For Change

And while an energy mix change is inevitable, that’s not a reason for the oil and gas industry to be less optimistic, he argued.

“It’s not a matter of one fuel source or the other, but rather all energy sources, including oil and natural gas, will be needed even as the world transitions to a lower intensity, lower-emissions future, he said.

The question is how do we ensure our that the necessary investments are made to meet the energy the world demands?

Creating an Attractive Investment Environment

For the oil and gas industry, this means developing and investing in important resource plays both in the offshore and onshore and throughout the business cycle.

However creating the right environment for industry to invest requires governments and policy makers to partner with industry to understand the challenges and potential barriers to investment.

“Probably the overriding message I would have for policy makers is to remind them of the importance of maintaining a long-term perspective because nothing in our sector happens overnight,” said Biggs.

“When our industry considers investment decisions of the scale I outlined earlier, we look beyond current market conditions to evaluate what energy supplies the world will need down the road. We do it this way because we know that sustained investment and innovation are critical to meeting the world’s future demands,” he added.

“As we make those decisions we ask governments and policy makers to develop transparent and simple regulatory frameworks that are cognizant of the long-term nature of developing energy supplies,” Biggs continued.

“This is not only in the interest of my industry but serves the interests of the communities where we operate, and in this regard there can be no better example of partnership than in North Dakota – where the industry and the state are delivering tremendous benefits to the local economy,” he said.

Private Investment Delivers State Benefits

In fact it is perhaps overlooked by many, but Biggs argues, that we should not take for granted the direct benefits that the oil and gas industry can deliver even during a low price environment.

“Just take a look at North Dakota, it’s eye-opening,” Biggs said.

He pointed to numbers from North Dakota State University, that estimated that the industry has generated $3.5 billion in oil and gas royalties and $2.9 billion in private mineral royalties since 2014. The economic benefits also include approximately 56,000 jobs in direct and secondary employment, representing 14 percent of the state’s total workforce and 17 percent of the jobs in the private sector.

On a per rig basis, $64 million in in-state expenditures is created, along with $1.47 million in tax revenues. On a per well analysis, each sees $1.8 million in gross business volume, $118,000 in tax revenues, and the creation of $148,000 in wages and salaries, the NDSU study concluded.

“It is incredibly important for policy makers to recognize the benefits that come with the creation of a long-term attractive investment environment. And it is so important for us in industry not to take this for granted either and understand that our ability to promote prosperity is critical to maintaining our license to operate where we live and work,” he said.

Hess Reports Estimated Results for the First Quarter of 2020

Hess Corporation (NYSE: HES) today reported a net loss of $2,433 million, or $8.00 per common share, in the first quarter of 2020, including impairment and other after-tax charges of $2,251 million resulting from the low price environment, compared with net income of $32 million, or $0.09 per common share, in the first quarter of 2019. On an adjusted basis, the Corporation reported a net loss of $182 million, or $0.60 per common share, in the first quarter of 2020.

CEO John Hess addressed the far-reaching impact of the oil price war on CNBC’s Fast Money on March 12, saying: “The economic problem we're facing today is a lot more than oil, and the oil price crash could be a catalyst that propels the world into an economic recession.”